Could This Be Gogo's Breakout Quarter?

Gogo is a potentially explosive company with a valuation to match. Could this be its breakout quarter?

Gogo(NASDAQ:GOGO) is a company with a unique market opportunity and a very differentiated service, offering a wide open field if it can close the deal. Earnings remains negative, even though profitability is getting closer, and this quarter could be critical. What are the things you should look for when Gogo reports earnings tomorrow?

The last two quarters set a high barConsensus revenue and EPS for the quarter is $85.5 million and a loss of $0.27. Expectations will likely be higher since the company beat both the top and the bottom line in each of the last two quarters. Revenue and earnings have beat consensus by an average of 10% and $0.13, respectively, but since EPS remains negative, investors are likely to be flexible as long as profit does not miss.

Focus will be on the U.S. Last quarter, as a region, the U.S. showed positive adjusted EBITDA, and the losses incurred internationally were mostly due to the company's network expansion. As a more stable margin becomes apparent in the U.S., analysts will likely apply this figure to other regions as the company gains a larger presence in foreign markets.

Wired aircraft show business jets rampingLast quarter, Gogo had 2,011 commercial aircraft and 1,847 business

jets wired. Commercial aircraft increased by 29 planes, but the business aircraft increased by 163 over the second quarter. This is an important point because the owners of these business jets are less price-sensitive than consumers and could represent a tremendous growth opportunity as the company scales from its current level of approximately 2,000 business jets to the 20,000-plane market in the U.S.

New physical expansionThis large opportunity in business jets may be the reason Gogo has been expanding. Gogo recently leased a new location with 112,300 square feet of workspace, more than double the capacity of the company's existing facility. Investors will be looking to understand how the company plans to utilize the space when it moves later this year.

International is good for talking points, but not profitsRecent international contract wins include Japan Air and Aeromexico for both in-flight entertainment and Internet. The contract with JAL is for 77 of its 216 planes, and 75 of Aeromexico's fleet, according to the company. While these are good contract wins, the profit driver for the company will be in the U.S. for several more years as the international network is built out.

Growth is in data, not voice The potential use of cell phones in commercial flights has been a key issue for the stock, but may not be for the company. While it would definitely be incremental from a revenue standpoint, data services (including wireless Internet, text and entertainment) are what is driving new business. Commercial voice can always be added at a later date if airlines view the service as strategic. Delta has taken a hard stance against it, citing internal customer research that shows "voice calls in the cabin would be a disruption to the travel experience" and "'a clear majority of customers who responded to a 2012 survey said they felt the ability to make voice calls onboard would detract from -- not enhance -- their experience."

Focus on US growth and planes wired This could be a breakout quarter for Gogo since the U.S. market is profitable and expansion is occurring in several regions simultaneously. There are many interesting things happening with the company from a technology standpoint, but the impact on earnings and new technology should be negligible. For the next few years, profits are likely to come from the U.S. as the market gets built out, so keep an eye on the basics.

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